SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
X Securities Exchange Act of 1934
For the quarter ended September 30, 1998
Transition Report Pursuant to Section 13 or 15(d) of the
___ Securities Exchange Act of 1934
For the transition period from _________________ to ____________________
Commission File Number 1-5893
MOVIE STAR, INC.
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(Exact name of Registrant as specified in its charter)
New York 13-5651322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Madison Avenue, New York, N.Y. 10016
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(Address of principal executive offices) (Zip Code)
(212) 684-3400
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year, if changed
since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No |_|
The number of common shares outstanding on October 30, 1998 was 14,116,982.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
September 30, June 30,
1998 1998*
-------------- -----------
(Unaudited)
Assets
Current Assets
Cash $ 715 $ 546
Receivables, net 12,482 6,330
Inventory 21,611 20,945
Deferred income taxes 2,291 2,200
Prepaid expenses and other current assets 389 456
-------- -------
Total current assets 37,488 30,477
Property, plant and equipment, net 3,595 3,551
Other assets 892 906
Deferred income taxes 1,718 1,809
-------- -------
Total assets $43,693 $36,743
======== =======
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 7,254 $ 328
Current maturities of long-term debt 34 40
Accounts payable and accrued expenses 9,048 10,193
-------- -------
Total current liabilities 16,336 10,561
Long-term debt 20,972 20,980
-------- -------
Commitments and Contingencies - -
Stockholders' equity
Common Stock 161 161
Additional paid-in capital 3,789 3,789
Retained Earnings 6,053 4,870
-------- -------
10,003 8,820
Less: Treasury stock, at cost 3,618 3,618
-------- -------
Total stockholders' equity 6,385 5,202
-------- -------
Total liabilities and stockholders' equity $43,693 $36,743
======== =======
* Derived from audited financial statements.
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended
September 30,
----------------------------
1998 1997
-------- -------
Net sales $18,958 $15,202
Cost of sales 13,301 10,918
-------- -------
Gross profit 5,657 4,284
Selling, general and administrative
Expenses 3,718 3,449
-------- -------
Income from operations 1,939 835
Interest income (1) (24)
Interest expense 733 694
-------- -------
Income before provision for income taxes 1,207 165
Provision for income taxes 24 -
-------- -------
Net income $ 1,183 $ 165
======== =======
Basic net income per share $.08 $.01
==== ====
Diluted net income per share $.08 $.01
==== ====
Basic weighted average number of shares
Outstanding 14,117 13,960
====== ======
Diluted weighted average number of shares
Outstanding 15,068 15,868
====== ======
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
September 30,
----------------------------
1998 1997
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,183 $ 165
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 137 157
(Increase) decrease in operating assets:
Receivables (6,152) (4,798)
Inventory (666) (1,445)
Prepaid expenses and other current assets 67 (138)
Other assets (20) 36
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses (1,145) 321
-------- -------
Net cash used in operating activities (6,596) (5,702)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (147) (42)
-------- -------
Net cash used in investing activities (147) (42)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and capital
Lease obligations (14) (21)
Net proceeds from revolving line of credit 6,926 3,334
-------- -------
Net cash provided by financing activities 6,912 3,313
-------- -------
NET INCREASE (DECREASE) IN CASH 169 (2,431)
CASH, beginning of period 546 3,035
-------- -------
CASH, end of period $ 715 $ 604
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $216 $101
==== ====
Income taxes (net of refunds received) $ 10 $ (1)
==== ====
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying consolidated condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of September 30, 1998 and the results of operations for the interim periods
presented and cash flows for the three months ended September 30, 1998 and
1997, respectively.
The condensed consolidated financial statements and notes are presented as
required by Form 10-Q and do not contain certain information included in
the Company's year-end consolidated financial statements. The year-end
condensed consolidated balance sheet was derived from the Company's audited
financial statements. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes included in the 1998
Annual Report on Form 10-K.
2. The results of operations for the three months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
3. Certain items included in these statements are based upon estimates. The
cost of sales is determined utilizing estimated gross profit rates. The
calculation of the actual cost of sales is predicated upon a physical
inventory taken at the end of each fiscal year.
An approximate breakdown of the inventory in thousands is as follows:
September 30, June 30,
1998 1998
------------ --------
Raw materials $ 5,275 $ 8,762
Work-in process 2,577 2,431
Finished goods 13,759 9,752
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$ 21,611 $20,945
======== =======
4. The Company's calculation of Basic and Diluted Net Income Per Share are as
follows (in thousands, except per share amounts):
<PAGE>
<TABLE>
Three Months Ended
September 30,
------------------------
1998 1997
-------- -------
<S> <C> <C> <C>
Basic Net Income Per Share:
Net Income to Common Stockholders $ 1,183 $ 165
Basic Weighted Average Shares Outstanding 14,117 13,960
Basic Net Income Per Share $.08 $.01
===== ====
Diluted Net Income Per Share:
Net Income to Common Stockholders $ 1,183 $ 165
Plus: Interest Expense on 8% Convertible Senior Notes 7 14
------- -------
Adjusted Net Income $ 1,190 $ 179
======= ========
Weighted Average Shares Outstanding 14,117 13,960
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 951 1,908
------- -------
Diluted Weighted Average Shares Outstanding 15,068 15,868
======= =======
Diluted Net Income Per Share $.08 $.01
==== ====
</TABLE>
All shares of potential exercisable stock options are not included in the
Diluted Net Income Per Share calculation because they are considered
antidilutive.
5. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
is effective for the Company for the year ended June 30, 1999 (fiscal
1999). SFAS No. 131 requires disclosure about operating segments in
complete sets of financial statements and in condensed financial statements
of interim periods issued to shareholders. The new standard also requires
that the Company report certain information about their products and
services, the geographic areas in which they operate, and major customers.
The Company has not yet determined the impact of the adoption of SFAS No.
131.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements with
respect to anticipated results, which are subject to a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: business conditions and growth in the Registrant's industry;
general economic conditions; the addition or loss of significant customers; the
loss of key personnel; product development; competition; foreign government
regulations; fluctuations in foreign currency exchange rates; rising costs of
raw materials and the unavailability of sources of supply; the timing of orders
placed by the Registrant's customers; and the risk factors listed from time to
time in the Company's SEC reports .
Results of Operations
Net sales for the three months ended September 30, 1998 increased by 24.7% to
$18,958,000 from $15,202,000 in the comparable period in 1997. The increase in
sales resulted from higher sales in the intimate apparel division of
approximately $4,050,000 offset partially by a decrease in the retail division
of approximately $280,000. Net sales in the intimate apparel division increased
to $17,154,000 due to the retailers' positive acceptance of the Company's
moderately priced fashion forward products. Net sales in the Company's retail
division decreased to $1,804,000 primarily due to extreme heat and hurricanes in
the geographic areas in which the stores are located, resulting in fewer
customers.
The gross profit percentage increased to 29.8% for the three months ended
September 30, 1998 from 28.2% in the similar period in 1997. The gross margin in
the Company's intimate apparel division increased to 29.8% in 1998 from 28.2% in
the similar period in 1997. The higher margins in the intimate apparel division
resulted primarily from the Company's shift of production to Mexico-based
contractors, operational efficiencies and a more favorable sales mix. The shift
in production to Mexico-based contractors has enabled the Company to take
advantage of lower duty rates that result from the North American Free Trade
Agreement ("NAFTA"). Certain of the raw materials used in the production of the
Company's products in Mexico are subject to export limitations under NAFTA,
called Tariff Protection Levels ("TPL"), that are similar to quotas. TPL is
assigned annually to various categories of textiles and is available on a
"first-come first-served" basis to U.S. companies exporting products from Mexico
containing the textiles subject to the TPL. In September 1998, for the first
time since 1996, when the Company began its efforts to increase production in
Mexico, certain of the raw textile materials used in the Company's products
reached the maximum annual TPL. As a result, the rate of duty for this category
of products shipped from Mexico to the United States in the last four months of
calendar year 1998 will increase from 2.8% of the value of the finished product
to 16.6% of that value. The Company is continuing its investigation of various
alternatives to minimize the impact of this increase, including the possibility
of deferring the shipment of finished products until the beginning of calendar
year 1999 when the full amount of TPL for that year will be available. Although
the actual cost to the Company of the increased duty cannot be precisely
quantified at this time, the Company believes it will not have a material
adverse impact on the Company's financial results for the 1999 fiscal year.
<PAGE>
The gross margin for the retail division increased to 30.1% for 1998 as compared
to 28.1% in the similar period in 1997. The higher margins in the retail
division resulted primarily from lower markdowns taken in the current
three-month period as compared to the same period in the prior year.
Selling, general and administrative expenses increased by $269,000 to $3,718,000
for the three months ended September 30, 1998 as compared to 1997. This increase
resulted primarily from increases in salary expense and salary related costs of
approximately $256,000, shipping expense of approximately $139,000 offset
partially by decreases in advertising expense of $116,000 and commissions of
approximately $34,000.
Income from operations increased to $1,939,000 for the three months ended
September 30, 1998, from $835,000 for the similar period in 1997. This increase
was due to higher sales and margins partially offset by an increase in selling,
general and administrative expenses. The Company's retail division had a loss
from operations of $78,000 for the three months ended September 30, 1998 as
compared to a loss from operations of $93,000 for the similar period in 1997.
The operational results for the retail division are based on direct operating
expenses and do not include any indirect corporate overhead.
Interest income for the three months ended September 30, 1998 decreased by
$23,000 from the comparable period in 1997.
Interest expense for the three months ended September 30, 1998 increased by
$39,000 from the comparable period in 1997 primarily due to higher short-term
borrowings needed to fund the additional increase in business.
The Company provided for an income tax provision of $24,000 for the three months
ended September 30, 1998 as compared to no income tax provision or benefit for
the same period in 1997.
The Company had net income of $1,183,000 and $165,000 for the three months ended
September 30, 1998 and 1997, respectively. This improvement was due to higher
sales and margins offset partially by an increase in selling, general and
administrative expenses, interest costs, and income taxes and a decrease in
interest income.
Liquidity and Capital Resources
For the three months ended September 30, 1998, the Company's working capital
increased by $1,236,000 to $21,152,000, principally from operating profits.
<PAGE>
During the three months ended September 30, 1998, the Company used $6,596,000 in
its operations, $147,000 for the purchase of fixed assets and $14,000 for the
repayment of long-term debt. Cash increased by $169,000 to $715,000. An increase
in short-term borrowings of $6,926,000 funded these activities.
Receivables at September 30, 1998 increased by $6,152,000 to $12,482,000 from
$6,330,000 at June 30, 1998. This increase is due to normal seasonal shipping
fluctuations within the period in the Company's intimate apparel division.
Inventory at September 30, 1998 increased by $666,000 to $21,611,000 from
$20,945,000 at June 30, 1998. This increase in both the intimate apparel and
retail divisions resulted from the normal fluctuation in sales during the July
through December period. The inventory for the retail division also increased as
a result of the early receipt of goods due to favorable buying opportunities and
an expanded product line that includes higher priced brand name products.
The Company does not anticipate making any additional purchases of its stock and
anticipates that capital expenditures for fiscal 1999 will be less than
$700,000.
The Company has $20,893,500 in long-term debt and a secured revolving line of
credit of up to $13,500,000. The long-term debt consists of $9,987,000 of
12.875% Subordinated Debentures, $10,550,000 8% Senior Notes, $278,500 8%
Convertible Senior Notes held by affiliates of the Company and $78,000 8%
Convertible Senior Notes held by non-affiliates of the Company. The remaining
sinking fund requirement for the 12.875% Subordinated Debentures is $3,737,000
due on October 1, 2000 and the balance of the principal in the amount of
$6,250,000 is due on October 1, 2001. The 8% Senior Notes and the 8% Convertible
Senior Notes do not require any amortization and mature on September 1, 2001.
The 8% Convertible Senior Notes held by affiliates of the Company are required
to be converted into 742,667 shares of the Company's common stock on or before
March 31, 1999. The $78,000 8% Convertible Senior Notes held by non-affiliates
of the Company are convertible into the Company's common stock, at any time
prior to maturity, at a price of $0.375 per share prior to maturing.
The Company's secured revolving line of credit is in effect until June 30, 1999,
and, by its terms, shall be renewed from year to year thereafter, unless sooner
terminated or renegotiated by the Company and its lender. This line of credit
covers the Company's projected needs for operating capital and letters of credit
to fund the purchase of imported goods. Direct borrowings under this line bear
interest at the annual rate of 2.0% above the prime rate of Chase Manhattan
Bank. Availability under the line of credit is subject to certain agreed upon
formulas. Under the terms of this financing, the Company has agreed to pledge
substantially all of its assets, except the Company's domestic inventory and
real property.
Management believes its available borrowing under its secured revolving line of
credit, along with anticipated internally generated funds, will be sufficient to
cover its working capital requirements. Management is also currently exploring
alternatives for refinancing the long-term debt.
<PAGE>
Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The statement requires that public enterprises report certain information about
operating segments in complete sets of financial statements of an enterprise and
in condensed financial statements of interim periods issued to stockholders. It
also requires that public enterprises report certain information about their
products and services, geographic areas in which they operate, and major
customers.
The Company is required to adopt SFAS No. 131 in fiscal 1999 and the Company's
year end consolidated financial statements will reflect the appropriate
disclosures.
YEAR 2000
Overview
The Year 2000 issue is primarily the result of computer programs only accepting
a two-digit date code, as opposed to four digits, to indicate the year.
Beginning in the Year 2000, and in certain instances prior to the Year 2000,
these date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, the Company's date
critical functions may be adversely affected unless these computer systems and
software products are, or become, able to accept four digit entries.
Internal systems and equipment
The Company has commenced a comprehensive program consisting of identifying,
assessing and, if necessary, upgrading and/or replacing its systems and
equipment that may be vulnerable to Year 2000 problems. The first stage of this
program, identifying the systems and equipment, has been substantially
completed. The Company has prioritized the identified items as either critical
or non-critical to the operations of the Company. The Company has made
substantial progress through the second and third stages of this program,
assessing and upgrading and/or replacing the equipment it has deemed to be
non-compliant. The Company is also in the beginning stage of developing a plan
to test its entire system for Year 2000 compliance. The Company believes that it
will have completed all of its necessary upgrades and/or replacements and the
testing of its systems by April 1999.
Third party relationships
The Company has begun to formally communicate with its significant suppliers and
customers to determine if those parties have appropriate plans to remedy Year
2000 issues when their systems interface with the Company's systems or may
otherwise impact the operations of the Company. There can be no assurance,
however, that the systems of other companies on which the Company's processes
rely will be timely converted, or that a failure to successfully convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have an impact on the Company's operations. The Company
believes that by February 1999 it will complete its assessment of the status of
its customers' and suppliers' compliance with Year 2000 issues.
<PAGE>
Contingency plans
Based on the assessment efforts to date, the Company has focused on three
separate contingency plans (1) if the Company's systems are non-compliant (2) if
the Company's customers are non-compliant and (3) if the Company's suppliers are
non-compliant. The Company is in the early stages of developing these plans and
believes that it will be able to fully determine its worst case scenarios by
April 1999. There can be no assurance that the Company will be able to have a
contingency plan in place for a significant supplier and/or customer that does
not become Year 2000 compliant.
Costs/Risks
Management currently estimates that the cost, in connection with bringing its
own systems and equipment into compliance, was less than $50,000 for fiscal
1998, less than $25,000 in the first quarter of fiscal 1999 and does not expect
the additional cost to exceed $225,000. Although the Company is not aware of any
material operational issues or costs associated with preparing its internal
systems for the Year 2000, there can be no assurance that there will not be a
delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address the Year 2000.
Potential sources of risk include but are not limited to (a) the inability of
principal suppliers to be Year 2000 compliant, which could result in delays in
product deliveries from such suppliers, (b) the inability of our customers to
become compliant, which could result in them not accepting our product in a
timely manner causing the Company to be in an over inventoried position
resulting in a disruption of its cash flow, and (c) disruption of the
distribution channel, including ports and transportation vendors as a result of
general failure of systems and necessary infrastructure such as electrical
supply.
<PAGE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which involve certain risks and uncertainties.
The Company's actual results or outcomes may differ materially from those
anticipated. Important factors that the Company believes might cause differences
are discussed in the cautionary statement under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-Q. In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.
<PAGE>
PART II Other Information
Item 1 - Legal proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - None
Item 5 - Other Information - None
Item 6 - (a) Exhibits - None
(b) Form 8-K Report - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MOVIE STAR, INC.
By: /s/ MARK M. DAVID
---------------------
MARK M. DAVID
Chairman of the Board;
Chief Executive Officer
By: /s/ SAUL POMERANTZ
----------------------
SAUL POMERANTZ
Executive Vice President;
Chief Financial Officer
November 10, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 13,818
<ALLOWANCES> 1,336
<INVENTORY> 21,611
<CURRENT-ASSETS> 37,488
<PP&E> 7,952
<DEPRECIATION> 4,357
<TOTAL-ASSETS> 43,693
<CURRENT-LIABILITIES> 16,336
<BONDS> 20,972
<COMMON> 161
0
0
<OTHER-SE> 6,224
<TOTAL-LIABILITY-AND-EQUITY> 43,693
<SALES> 18,958
<TOTAL-REVENUES> 18,958
<CGS> 13,301
<TOTAL-COSTS> 13,301
<OTHER-EXPENSES> 3,717
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 733
<INCOME-PRETAX> 1,207
<INCOME-TAX> 24
<INCOME-CONTINUING> 1,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,183
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
